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The secret to Alibaba’s success

Chinese e-commerce giant Alibaba has positioned itself perfectly to capture the strong growth in China’s consumer market by creating a credit culture in a country where trust is still a weak spot.

When Yahoo released its first quarter financial results, the most keenly-watched figures were not about the company itself, but instead those of Chinese e-commerce giant Alibaba, which Yahoo partly owns. Yahoo’s shares surged as much as 9 per cent in heavy trading yesterday after Alibaba revealed its fourth quarter earnings.

Traders scrambled to buy Yahoo’s shares as a proxy for Alibaba, which is expected to lodge a prospectus in the coming days ahead of its initial public offering in the US. Yahoo was the most traded stock on the Nasdaq on Wednesday.

The Chinese e-commerce giant’s fourth quarter result was simply stunning. It earned US$3.06 billion, a 66 per cent rise compared with the same period last year. Total revenue for 2013 was $7.95 billion and net profit was $3.54 billion, which means its margins were 44.5 per cent.

Alibaba’s stunning growth completely overshadowed Yahoo’s own anaemic growth. Analysts have recommended aggressive buying of Yahoo shares ahead of Alibaba’s IPO and many have raised their price targets for Yahoo, which owns 24 per cent of Alibaba.

Speculation over Alibaba’s valuation has reached a crescendo in recent days, with some analysts valuing the Chinese company as high as $190 billion. This would make Alibaba one of the most valuable internet companies in the world, surpassing other household names like Amazon and Facebook.

So what is the secret behind Alibaba’s extraordinary success?

It is in fact quite simple: the company is an undisputed market leader in China’s fastest-growing sector -- online retail. Alibaba serves 6.5 million merchants and 300 million retail customers around the world.

The combined sale of its two flagship online bazaars -- Taobao and T-Mall -- is more than Amazon and eBay combined. The company is estimated to have 5 per cent of the retail market in China, which is expected to become the world’s largest consumer market.

Though there is much talk that China doesn’t consume enough and its economy relies on investment too much, the country is in fact the fastest-growing consumer market in the world.

China’s consumption has been growing at 9 per cent every year for the last decade, which is quite phenomenal. In fact, the first quarter GDP data released yesterday also shows strong growth in consumer spending.

Wages have also been rising fast in China. Disposable incomes for urban residents increased 9.8 per cent during the first quarter of 2013 and 12.3 per cent for Chinese rural residents. Income increase in China continues to outstrip economic growth.

Alibaba is perfectly positioned to capture the strong growth in China’s consumer market. The company is also doing something unique: It is creating a credit culture in a country where trust is weak.

Jack Ma, the charismatic founder and chairman of the company, said in November last year that he wanted to create an ecosystem based credit culture. “We can use cloud computing and big data to build credit dossier for each person,” he said at an internet finance forum.

Alibaba is marshalling transaction data from millions of traders and buyers on its online shopping bazaars and building credit profiles for them. Its finance arm Alipay lends money to people based on its databank of people’s credit history.

The company is also playing an important role in speeding up financial reform in China. For years Chinese banks have been able to enjoy lucrative revenue from the guaranteed spread they earn from artificially-controlled interest and deposit rates. They are able to suck in trillions of cheap funding from the world’s most diligent savers and pay them a pittance.

Long-suffering Chinese depositors have nowhere else to put their money into productive use so they have to put up with banks. Return on their money are often little better than stuffing cash under their mattresses.

Then Alibaba comes along and offers people an alternative, an internet-based product call Yuebao that offers nearly double the interest that banks pay. Jack Ma famously said: “If banks don’t change, we will change them.”

The rise of Alibaba is an incredible story of the coming of the age of a new Chinese economy. Innovation championed by Alibaba is disrupting cosy monopolies and helping to unleash a retail revolution in China.

Amid a gloomy outlook for the Chinese economy, the success of Alibaba is an encouraging sign that the old unsustainable model is gradually giving way to a new model based on innovation and private entrepreneurship.

IMPORTANT: This information is general financial product advice only and you should consider the relevant product disclosure statement (PDS) or seek professional advice before making any investment decision. Product disclosure statements for financial products offered through InvestSMART can be downloaded from this website or obtained by contacting 1300 880 160. You should consider the product disclosure statement before making a decision about a product. All indications of performance returns are historical and cannot be relied upon as an indicator for future performance.